Inflation

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Inflation

  1. 1. INFLATION And its effects on PAKISTAN’S Economy. Presented by: Khisal Iftikhar
  2. 2. What is INFLATION??? • Inflation is a rise in general level of prices of goods and services in the country over a period of time. As the cost of goods and services increase, the value of a currency declines because you won't be able to purchase as much with that currency as you could have last month or last year.
  3. 3. According to Meyer: • “An increase in the prices that occurs after full employment has been attained.” According to Ackely: • “A persistent and appreciable rise in the general level or average of prices.” According to Crowther: • “In the state of inflation the prices are rising i. e., the value of money is falling.” According to Coulbourn: • “In inflation, too much money chases too few goods.”
  4. 4. Situation in Pakistan: Today, inflation is one of the serious problems faced by Pakistan. Rate of inflation in Pakistan is very high. According to economic survey 2009-10, its rate is 13.3 %, According to ESP 2011-12, rate of inflation (CPI) is 10.8%. Pakistan has an average of 11.6% inflation per year.
  5. 5. Explanation All above definitions are showing that inflation is a condition in which prices rise and money value decreases. Due to inflation the real value of money i. e., the purchasing power decreases.
  6. 6. Effects of Inflation Inflation is famous for its negative effects and destruction. But It has some positive aspects as well.
  7. 7. Positive Effects (if inflation rate is 2% to 4%) • Increase in production due to inflation. • Increases the employment opportunities in the country. • Enhances the process of economic development. • Increases the economic activities that may cause to inventions and innovations. • Profit of the producers also increases when there is normal inflation.
  8. 8. Negative Effects • It is a huge problem for employees, taking fixed salaries. • It generates unfair distribution of income and wealth. • Inflation reduces the saving of the population. • It is a cause of unfavorable balance of trade and payment. • Inflation increases the rate of interest. • It creates a lot of social evils.
  9. 9. Negative Effects • It is difficult for consumers to purchases more goods. • It generates very bad effects on the poor labor force. • Inflation reduces the living standard and purchasing power of people. • It is harmful for creditors. • Inflation reduces the purchasing power.
  10. 10. Types of Inflation Demand Pull Inflation: This is demand side inflation. It simply means that when there is an increase in aggregate demand. Without any corresponding increase in aggregate supply the price level will rise.
  11. 11. Types of Inflation Cost Push Inflation: It is supply side inflation. If there is increase in prices it will results in fall in aggregate supply. It is the reason of increase in cost of production. Structural Inflation: Sometimes prices rise in an expanding economy because the supply cannot keep up with rising demand because of structural inflexibilities.
  12. 12. Types of Inflation Imported Inflation Devaluation Inflation Anticipated Inflation Unanticipated Inflation Ex-ante & Ex-post Inflation Deficit Inflation Suppressed Inflation Open Inflation Income Inflation Ceiling Inflation
  13. 13. DEGREES OF INFLATION: Moderate Inflation: • When the rate of inflation is very low, say in the range of 1% to 20%, it is moderate inflation. Galloping Inflation: • When the rate of inflation exceeds 20 % it is called galloping inflation. Hyper Inflation: • If the rate of inflation is above 1000 %, it can be termed as hyper-inflation.
  14. 14. CAUSES OF INFLATION IN PAKISTAN Increase in Demand Decreas e in Supply
  15. 15. Increase in Demand Increase in Money Supply: The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services. Increase in Velocity of Money: According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation.
  16. 16. Increase in Demand Non-productive Expenditures: Government of Pakistan has to make a lot of non-productive expenditures like defense etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation Corruption & Black Money: Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume.
  17. 17. Increase in Demand Foreign Remittances: Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation. Foreign Aids: Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.
  18. 18. Increase in Demand Consumption Trends: Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation. Population Bomb: Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.
  19. 19. Decrease in Supply 1) Slow Agricultural Development: Shortage of Productivity Low Supply Increase in price level 2) Slow Industrial Growth: Backward techniques of production
  20. 20. Decrease in Supply 3) Increase in Wages & Salaries: Increase in Cost Increase in Income Increase in Prices Inflation
  21. 21. 4) Increase in Prices of Imports: Increase in the prices of imports also leads to inflation. If there is an increase in the prices of oil and other imported raw material then it will cause to reduction in supply. 5) Devaluation: The value of our currency is decreased due to devaluation. It makes imported goods more expensive and it leads to shortage of supply.
  22. 22. Pakistan’s Inflation Rate (2002-12) Inflation Rate 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
  23. 23. Comparison With Bangladesh Yearly Inflation Rate 25.00% INFLATION RATE 20.00% 15.00% Pakistan 10.00% Bangladesh 5.00% 0.00% 2002 2003 2004 2005 2006 2007 YEARS 2008 2009 2010 2011 2012
  24. 24. Measures to Control Inflation. • Government should first check the corruption to eliminate the inflation. • Increase in the growth rate of output. • Government should control the supply of money through effective monetary policy.
  25. 25. • Increasing unproductive expenditures must be controlled. • Control on population is also necessary to control inflation. • Effective tax system will be helpful to control the inflation. • Improvement in balance of payment.
  26. 26. Measures to Control Inflation. • Development of agricultural and industrial sector. • Reduction in budget surplus. • Reduction in monetary expansion.
  27. 27. References http://finance.gov.pk/survey/chapters_13/07-Inflation.pdf http://en.wikipedia.org/wiki/Inflation_in_Pakistan http://en.wikipedia.org/wiki/Inflation http://ahsankhaneco.blogspot.com/2012/04/inflation-inpakistan-its-types-causes.html http://finance.gov.pk/survey/chapters_13/executive%20su mmary.pdf http://en.wikipedia.org/wiki/Economy_of_Pakistan

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